Keegan and PMI merge to form Asanko Gold

Keegan Resources (KGN-T) and PMI Gold (PMV-T), who share a property boundary in Ghana, are tying the knot to form Asanko Gold.

The merger is an attempt by both management teams to forge West Africa’s next mid-tier producer in the most efficient way, and could be the beginning of a larger trend of consolidation — a trend than many in the industry see as necessary in cost sensitive times.

From a shareholders perspective, a merged company will win a more advanced development project for Keegan shareholders, while PMI shareholders get access to Keegan’s considerable cash position and its further down the line development project. As of September 30, Keegan had roughly $186 million in cash in cash equivalents on its balance sheet.

PMI has the Obotan project, which is expected to turn out 200,000 oz. of gold per year, starting in 2014, while Keegan owns the Esaase project, which is slated to contribute between 150,000 and 200,000 oz. per year by 2017. The two properties sit side-by-side on Ghana’s prolific Asankrangwa gold belt.

Esaase has measured and indicated resource of 68.9 million tonnes grading 1.73 grams gold for 3.83 million oz. of gold while Obotan has measured and indicated resources of 44.79 million tonnes grading 2.16 grams gold for 3.11 million oz.

The plan will be to use Keegan’s capital to help drive development of Obotan and then fund Esaase out of cash flows generated from the mine.

By combining the land packages, the newly formed Asanko Gold will control roughly 1,000 sq. km and will have consolidated the 70-km of strike length along the Asankrangwa gold belt.

Bringing the two projects together should also yield both operational and capital synergies, but hard numbers on such synergies won’t be known until an optimization analysis is done.

The deal will see PMI shareholders get 0.21 Asanko shares for each PMI share, while Keegan shareholders do nothing. That balancing out will give both shareholders an equal stake in the 171.7 million shares outstanding of the merged entity.

The two companies have similar market caps with Keegan’s coming in at roughly $325million, while PMI is close to $335 million and the combined company will have about $340-million in cash on hand and no debt.

In Toronto on Dec. 4, Keegan shares closed 1.5% or 6¢ higher at $3.97 a share while PMI shares were up 12% or 9¢ to 81¢ per share.